stockconsultant.com
TONIGHTS TUTORIAL:
Every issue we try and include a teaching tutorial to help you become a better
trader.
Knowledge is key in this tough game…
Thursday we did part three of this series on daytrading. We went over the concepts
of why we need great a great brokerage that is designed to handle daytrading
and why an "instant execution" trading system is a must to do this right. Tonight
we will look at something else that is necessary as a daytrader, and generates
a lot of reader interest…NASDAQ Level II
Remember friends what this series is about is serious daytrading . We have
started by giving a history, and going over the concepts. Then we moved into
the "tools" that are necessary. Thursday we did the trading system that you need,
and tonight we get into another necessity of daytrading…the proper quote system.
Not long ago, everyone was thrilled simply because there were places on the Internet
that would post share prices that you could see right on your computer. These
were usually one price quotes, and they were always 20 minutes delayed. Then
as the internet evolved and people became more sophisticated..they wanted more
information and they wanted it quicker. Sites sprang up that offered "live" quotes
and at the time it was like some hypnotizing drug! I remember seeing "newbies"
sitting in front of their computers and staring at a live ticker going by simply
amazed at the technology. This was a real help to people who were trading their
own stocks,but again as technology advanced so did the Internet and so did software.
Brokerages started using a system called Level II which at first wasn't available
to the public. Well, if live time quotes are level I, what is level II and why
do you need it?? Wow I could write a book on this alone, but lets take a look
at the "basics" .
Level II is a world unto itself in a way. If you think that having live quotes
is great, that pales in comparison with the information available in Level II.
This is an Internet delivered quote system that not only shows you the bid and
the asking price, that is almost a "given" , what Level II does that is so interesting
is this… it shows you all the market makers that make a market on a particular
stock (by name) , their bid and ask, the amount of shares they are willing to
buy or sell, whether their last move was to increase prices or lower them, the
exact time of the sale or buy, the amount of shares in the sale or buy, color
codes different price "blocks", and many other important features.
Probably the most important thing Level II does is this…since you are seeing
all this information in live time, you can spot trends developing on a stock
and "anticipate" where the prices will be heading in the short term. For instance
lets say that There are 5 market makers willing to buy ABCD stock for 60 dollars
(they would be "on the bid") and only 2 selling it at 60 ¼. ( they would be
on the "ask") Now as you are watching another sale comes in and the "top guy"
offering stock at 60 ¼ gets taken out, leaving only one, and another Market Maker
jumps on the bid at 60. That would show that the "pressure" by the market makers
is upward as a lot of them are willing to buy it from you at 60, and only one
is willing to sell it at 60 ¼. Now suppose the last guy on the ask at 60 ¼ gets
taken out (another buy comes in at 60 ¼ and there is no one left at that price)
What you will watch is the next Market makers who are willing to sell at 60
5/16 will take "top spot" and the market makers on the buying side will move
up their bid to say 60 1/8. As you are watching this it is clear to you that
market makers are willing to buy the stock, with not many lined up to sell it
meaning that the price of that issue is rising for the short term (short term
here could mean 1 minute to 5 minutes for example)
These are some of the things you will start to look for when using level II.
You will be able to see if the "depth" of market makers is deeper on the buy
side or the sell side, and watch as more come into an issue. With practice you
will be able to tell pretty closely when a run is beginning, when its starting
to stall, and when it reverses into a slide. Coupled with the proper execution
system, you can spot these trends and hop into and out of the stock in seconds,
picking off profits as they present themselves. With experience in using this
took it will be common for you to buy a stock based on the level II "stack up"
of market makers on the bid, run it up for ½ point, sell it out, and instantly
short the same issue as Level II shows that selling will be driving it back down!
Again an entire book could be written about all the ways to utilize this great
tool, but if you remember nothing else from this tutorial series recognize this…
you need a great execution system and you need Level II. So the question becomes…where
do you get it?? Well there are quite a few outfits that offer level II quote
systems and some of them are pretty good,but it can get very expensive (150 a
month is common) but you still need an execution system to use with it. Thursday
night I told you all of the execution system that I use (www.shamrockonline.com)
and this is an interesting situation also. Shamrocks execution system includes
Level II with it, and if you make just 15 trades a month…level II is free. I
do not want you to think this is a commercial for shamrock, simply that I have
used quite a few of the systems out there, and these are the guys I am happiest
with. If my experience will help you, then I don't feel bad in telling you who
I use.
So now we have explored what day trading is, what we are trying to do with
it, what kind of "tools" you need, and Tuesday we will start to put some of
this together into a real world example how to make it all work to put money
in your account.
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